Throughout 2012, the high-yield municipal bond sector has attracted strong fund inflows that have helped the sector outperform high-grade municipals and most taxable bond market sectors as well.
We used Interactive Data’s evaluated bid price and yield information to examine the performance of eight distinct categories of high-yield municipal bonds from March 21, 2012 through September 21, 2012. Because many high-yield municipal bonds trade infrequently, independent fixed income evaluations (which are updated daily based on current market observations) can provide a broader picture of pricing trends in this sector as opposed to the last trade prices.
Results of this analysis appear in the attached table.
Among the 12,633 high-yield municipal bonds in the sample, 83% had a higher evaluated bid price at the end of the period than at the beginning. That isn’t surprising, since bond markets in general have gained ground during the period. The average evaluated price gain among high-yield municipal sectors ranged from 1.26 points for corporate-backed industrial revenue bonds to 5.88 points for bonds issued by airport authorities and backed by airlines.
Among the 121 airline issues we tracked, several unsecured special facility revenue bonds backed by AMR Corp. — which had traded down to around $20 in late 2011 after AMR’s Chapter 11 bankruptcy filing — improved to an evaluated price in the $35 - $40 range this past March and to an evaluated price around $65 in September as the bankruptcy case progressed. Evaluated pricing for AMR-backed municipal bonds closely tracked the company’s corporate bonds, as is typical for bankrupt/distressed credits.
As a rough gauge of returns during the period, we added each bond’s six-month evaluated price change to its semi-annual coupon and divided the result by the bond’s evaluated price on March 21. The resulting ratios, averaged across each sector, indicate that tobacco bonds produced hypothetical returns averaging 13.47% (not annualized) during the latest six months. The sector containing the largest number of individual issues in our observations, Hospitals rated BBB to B, showed a 4.68% hypothetical average return.
For perspective, the Market Vectors High Yield Municipal Index ETF (ticker HYD), which aims to track the Barclays Capital Municipal Custom High Yield Composite Index, returned 9.18% (with dividends reinvested) over the same period, according to Interactive Data’s pricing and corporate actions information. An ETF based on a high-grade municipal index, the SPDR Nuveen Barclays Capital Municipal Bond ETF (ticker TFI), returned 5.29%.